Investment in commercial real estate is gaining popularity among investors in India. Both resident and Non-Resident Indians (NRIs) are eyeing CRE properties to get attractive returns on investments. While commercial properties are valued above Rs. 20 – 30 cr, individual investors can also buy such assets through fractional ownership (starting from Rs. 25 lakh) or Real Estate Investment Trust (REIT) (starting from less than Rs. 50,000). Let’s understand how a Real Estate Investment Trust in India works.
What is Real Estate Investment Trust (REIT)?
Real Estate Investment Trust (REIT) is a company that is established with the purpose of channeling investible funds into owning and operating income-generating real estate. REIT companies manage the portfolios of commercial real estate, including offices, warehouses, shopping centers, hotels, etc. REITs function in the similar way as mutual fund houses and give opportunity to all types of investors, big and small, to get a stake in real estate.
Real estate investment trust companies pool money from multiple investors and use that to buy income-generating real estate properties. REITs lease properties so that they can earn from rental income and capital appreciation. Investors can receive regular income in the form of a dividend.
Real estate investment trust in India
REITs were originally devised in the US in 1960 and the first REIT was listed on the New York Stock Exchange in 1965. In India, REITs were introduced by the Securities and Exchange Board of India (SEBI) in 2007.
In India, REITs primarily focus on office properties. Initially, the minimum investment in REITs was Rs. 50,000 with a lot size of 200 units. To increase liquidity and encourage more listings, the minimum investment has been reduced to Rs. 10,000 to Rs. 15,000 with a lot size of one unit.
The structure of REITs is similar to that of mutual funds, including fund management company, trustee and sponsor. The fund management company selects and purchases properties for the portfolio. The trustee ensures that funds pooled are utilized and managed while protecting the interest of investors. Investors get regular income in the form of dividends and can diversify their investment portfolio.
How does a company qualify as a REIT in India?
A company needs to follow the SEBI guidelines and Section 4 of the Regulations to qualify as a REIT:
- The trust instrument must be registered as a deed under the Registration Act, 1908.
- The trust should be created with the main objective of running a REIT business.
- Trustee, manager and sponsor all should be separate entities.
- Parties to the REIT need to fulfill the criteria mentioned in the Schedule II of SEBI (Intermediaries) Regulations, 2008.
- The company must have a minimum asset base of Rs. 500 cr.
- Must have a minimum of 100 investors.
- 50% of its share should not be held by less than 5 individuals during each taxable year.
- Real estate must constitute a minimum of 75% of investment assets.
- A minimum of 95% of REITs total income should be invested.
- 80% of the corpus should be invested in income-generating assets. Only 20% of the total investment can be placed in under construction assets.
Most popular REITs in India in 2022
Following are 3 popular REITs in India in 2022:
|REIT||Occupancy||52 Week High Share Price|
|Brookfield India Real Estate Trust||86%||INR 337.28|
|Embassy REIT||87%||INR 394.95|
|Mindspace REIT||84.6%||INR 365.00|
Types of Real Estate Investment Trust in India
Listed below are six types of Real Estate Investment Trusts in India based on the type of business they are engaged in.
Equity REITs: This type of REIT is among the most popular ones. Typically, they are involved in operating and managing income-generating commercial properties. The income earned through rent and capital appreciation is distributed to all the investors.
Mortgage REITs: Mortgage REITs or mREITs lend money to businesses that are involved in real estate activities. They generate income in the form of interest applicable on the money they lend. mREITs also acquire mortgage-backed securities.
Hybrid REITs: Individuals who invest in this type of REIT can diversify their portfolio by parking their money in both equity and mortgage REITs. So, investors can generate income through rent as well as interest.
Publicly Traded REIT: Shares extended by publicly traded REITs are listed on the National Stock Exchange (NSE) and registered with SEBI. Shares can be purchased and sold through NSE. They offer more liquidity but are subject to market volatility.
Private REITs: These trusts work as private placements and cater to a limited number of investors. This type of REIT is not registered with the SEBI and is not traded on any stock exchange.
Non-listed public REITs: These are real estate investment trusts which are registered with the SEBI, but they are not traded on the stock exchange. They are less liquid as compared to publicly traded REITs but are not affected by market volatility.
Benefit of Real Estate Investment Trust
Professional managers: A REIT is a trust managed by highly-qualified professionals. They select and purchase property for the portfolio. So, investors don’t need to worry about managing commercial real estate properties.
Low Investment: REITs are a good alternative to other high-ticket real estate investment options. You can start investing with as low an amount as Rs. 50,000. Hence, you can get exposure to commercial real estate business with low investments.
Capital gains: In India REITs primarily focus on commercial properties, including office space. The rental income and capital appreciation from such investments is higher as compared to other investments. REITs also trade on the stock market and a well performing REIT can possibly increase in value. Investors can sell these REITs at a profit over time.
Regular source of income: REITs generate income through rent and capital appreciation. 90% of the rental income is given to investors as interest and dividends. Hence, you can get regular income from such types of investments.
Diversification: Investors can diversify their investment portfolio by investing in REITs. Investors can get real estate exposure without owning and managing any commercial property. You can consider REITs for diversification beyond usual asset classes – mutual funds, FDs, equity, debt, gold, etc.
Non-Resident Indians who are confused or reluctant about investing in India due to lack of understanding of the Indian market, SBNRI will help you build a stable portfolio in an easy way.
To ask any question related to NRI investment in India, you can download SBNRI App from the Google Play Store or App Store. You can also use the SBNRI app for investment in stock market/ mutual funds, Pre-IPO, Asset Finance, Commercial Real Estate, Indian Startups Funds, NRI account opening, etc. To ask any questions, click on the button below. Also, visit our blog and YouTube channel for more details.